Chapter 9-Accounting for Current Liabilties Smartbook

On June 1, Sawyer Co. borrowed $5,000 by extending their past-due account payable with a 45-day, 12% interest-bearing note. On July 16, the due date, Sawyer pays the amount due in full. Sawyer would record this payment with a (debit/credit) _______ to Interest Expense in the amount of _______.

debit; $75 Reason: Interest Expense is debited for $75 computed as $5,000x.12x(45/360).

The difference between the income taxes expense reported in the income statement and the amount of income taxes payable to the government is called ___.

deferred income tax liability

Unemployment taxes are examples of _____ taxes.

employer

Obligations due after one year or one operating cycle, whichever is longer, are considered to be:

long-term liabilities.

Employee income tax depends on: (Check all that apply).

number of employee withholding allowances employee's income

A potential legal claim is recorded

only if payment for damages is probable and the amount can be reasonably estimated.

A ________ register is a report that shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period.

payroll

The ratio of income before interest expense (and any income taxes) divided by interest expense reflects the risk of a company not being able to pay fixed expenses if sales decline is called the ____________ ratio.

times interest earned

When recording a liability, a company may not know: (Check all that apply.)

whom to pay. when to pay. how much to pay.

Form 941, which employers use to report FICA and income tax information to the IRS is due:

within one month after the end of each calendar quarter.

Sheldon has a $15,000 liability for a machine that has an interest rate of 10%. The interest expense is

$1,500 Reason: $15,000 x .10 = $1,500

Damien Co. has $10,000 of unearned revenues on its balance sheet. Damien expects that it will earn $8,000 of these revenues in the upcoming twelve months. How much will be recorded in Long-Term Liabilities?

$2,000 Reason: $2,000. $8,000 is reported in the current liabilities section.

Winn Co. signs a 60 day note payable for a $15,000 copy machine with an interest rate of 8%. Winn will record total interest expense of

$200 Reason: $15,000 x .08 x (60/360) = $200.

Boyd's Bicycle Sales and Repairs Co. offers a 6-month warranty on all new bicycle purchases. Based on history, Boyd determines that warranty repairs are equal to approximately 2% of sales. During the month, Boyd sales total $20,000. Boyd will record Warranty Expense in the amount of ______ for the month.

$400 Reason: $20,000 x .02 = $400

On December 1, Hansen Co. borrows $100,000 cash from National Bank by signing a 90-day, 6% interest-bearing note. On December 31, Hansen will record an adjusting entry by debiting interest expense in the amount of ______.

$500 Reason: You are recording the amount accrued from 12/1 - 12/31: $100,000x.06x(30/360)=$500.

________ are amounts owed to suppliers for products or services purchased on credit.

Accounts payable

On November 1, Wright Co. borrowed $20,000 cash from Third Bank by signing a 90-day, 6% interest-bearing note. On December 31, Wright recorded an adjusting entry to interest expense of $200. On January 30, the due date of the note, Wright will record the payment with a debit to Interest Expense in the amount of $

Blank 1: 100 Reason: $20,000 x .06 x 30/360 = 100

On January 8, Lee Co. borrows $100,000 cash from National Bank by signing a 90-day, 6% interest note. On April 8, Lee Co. will pay National Bank a total of $101,500. Principal on the note totals $_____

Blank 1: 100,000 Reason: $100,000 x .06 x 90/360 = $1,500 $101,500 - $1,500 = $100,000

Jorge Lopez worked 40 hours this week and earned $1,000 in total compensation. Federal and state taxes and other withholdings totaled $350. Jorge's gross pay totals

Blank 1: 1000 or 1,000

On July 1, Scene Co. borrowed $15,000 cash from First Bank by signing a 30-day, 5% interest-bearing note. Scene will record this entry with a credit to Notes Payable in the amount of $_____

Blank 1: 15000

Trighton's Trailer Co. sells trailers and provides a one-year warranty on all new trailer sales. Based on history, Trighton anticipates that 2% of trailers will be returned and will have a warranty cost of $100 per trailer. During the month, Victor sold 300 trailers for a total of $255,000. At the end of the month, Trighton will record $_____ in warranty expense.

Blank 1: 600 Reason: 300 x .02 = 6 x 100 = $600

Jorge Lopez worked 40 hours this week and earned $1,000. Federal and state taxes, and other withholdings totaled $350. Jorge's net pay totals $____

Blank 1: 650 or $650

The form an employer files and submits to the IRS to report FICA tax information is Form ____

Blank 1: 941

Anchor Co. has accrued payroll expense of $1,300 which includes employee withholdings of $400. On payday, Anchor will record the distribution of paychecks with a credit to _____ in the amount of $____

Blank 1: Cash Blank 2: 900

Federal government taxes implemented on employers in order to provide unemployment benefits to qualified workers are known as (use acronym) _____

Blank 1: FUTA

Employer taxes, such as SUTA, are recorded with a debit to Employer Tax Expense and a credit to SUTA _____ until payments are submitted to the state.

Blank 1: Payable

State unemployment taxes imposed on employers in order to provide unemployment benefits to qualified workers are known as (use acronym)

Blank 1: SUTA

An employee earnings report is a ____ record of an employee's hours worked, gross earnings, deductions and net pay.

Blank 1: cumulative

A _____ liability is a liability due within one year or the company's operating cycle, whichever is longer.

Blank 1: current or short-term

A known obligation of an uncertain amount that can be reasonably estimated is called a(n) _____ liability.

Blank 1: estimated

Gross pay minus all deductions—including federal and state taxes, FICA and any voluntary deductions equals

Blank 1: net, take-home, or take home

The _____ of a note is the amount that the signer of a note agrees to pay back when it matures, not including interest.

Blank 1: principal or face value

A payroll ____ shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period.

Blank 1: register

A _____ is a seller's obligation to replace or fix a product (or service) that fails to perform as expected within a specified period.

Blank 1: warranty

On December 31, Lazo Co. offers a bonus to its employees of $100,000 to be paid in January of the following year. The December 31 journal entry will require a credit to the ______ account in the amount of _____.

Bonus Payable; $100,000

During the second quarter of the year, Francisco Co. accrued $8,000 of income taxes. On July 15, Francisco will send in the second quarterly payment. To record this payment, Francisco will enter which of the following entries? (Check all that apply.)

Credit to Cash Debit to Income Taxes Payable

John Grey owns Grey's Snow Plowing. In October, Grey's collects $12,000 cash for 6 commercial accounts for which he will provide snowplowing for the entire season. To record this transaction, Grey will enter which of the following entries? (Check all that apply.)

Credit to Unearned Plowing Revenue Debit to Cash

Patel Paving collected $1,000 cash in advance from a customer to provide paving services next month. The entry to record this cash receipt would include the following entries? (Check all that apply.)

Debit to Cash Credit to Unearned Paving Fees

Perez Co. sells automotive supplies and warranties them for a three-month period. Perez sold $10,000 of supplies during the month and anticipates that warranty repairs for these sales will total $250. The adjusting entry that Perez will make to record the warranty expense will include which of the following? (Check all that apply.)

Debit to Warranty Expense Credit to Estimated Warranty Liability

Employers use a special account for payroll for which of the following reasons? (Check all that apply.)

Ease of reconciling Internal control

Theo Co. has two full-time employees who are provided health insurance at Theo's expense. At the end of the period, the cost of the insurance totals $1,400. The entry that Theo will make to accrue these costs include a debit to the ___________ account.

Employee Benefits Expense

Camelot Co. expects that bonuses for the year will be $100,000. The 12/31 entry will require a debit to the ______ account in the amount of _____.

Employee Bonus Expense; $100,000

Simar Sales Co. sells and installs kitchen appliances. Simar guarantees parts and labor for one year after installation. Simar would record potential claims in a(n) _______ account.

Estimated Warranty Liability

Which of the following situations is not a contingent liability?

Future natural disaster

_____ is(are) the total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes.

Gross pay

On November 1, Lance Co. borrows $90,000 cash from First Bank by signing a 90-day, 5% interest-bearing note. On December 31, Lance will record an adjusting entry by crediting _______ in the amount of ______.

Interest Payable; $750 Reason: The computation of interest is $750 from November 1 to December 31 which is 60 days. $90,000 x .05 x (60/360)=$750.

Which of the following items are considered employee benefits? (Check all that apply.)

Medical insurance Pension plans

FICA tax includes both Social Security tax and

Medicare tax

Which of the following items is not a payroll deduction?

Net pay

On June 1, Button Co. borrowed $1,000 cash from National Bank by signing a 120-day, 6% interest-bearing note. Button will record this transaction with a credit to _____ in the amount of ______.

Notes Payable; $1,000

On January 1, Avers Co. borrowed $10,000 cash from Main St. Bank by signing a 60-day, 8% interest-bearing note. On March 1, Avers pays the amount due in full. The March 1 entry would be recorded by Avers with a debit to _____ in the amount of _______.

Notes Payable; $10,000 Reason: Notes Payable will be debited for $10,000. Cash will be credited for $10,800. The interest is recorded separately in the Interest Revenue account.

State unemployment taxes imposed on employers in order to provide unemployment benefits to qualified workers are known as:

SUTA

Damen's Co. sells merchandise with a list price of $500 and collects sales tax of $50. The sales tax would be recorded with a credit to which account?

Sales Tax Payable

Stalz Co. collected $2,500 in sales tax from customers during the month of February. In March, Stallon sends the $2,500 to the state government. The payment to the state would be recorded with a debit to which account?

Sales Tax Payable

Zion Co. sells $100 of merchandise and collects $10 sales tax. The sales tax is recorded to which account?

Sales tax payable

Employers are required to prepare and submit payroll reports to explain how they compute which of the following taxes? (Check all that apply.)

State taxes Local taxes Federal taxes

Which of the following situations would not be required to be recorded in the financial statements or reported as a note to the financial statements?

The liability is remote and estimated to be $30,000.

Employers must pay employee taxes in addition to those paid by the employees. Which of the following is paid only by the employer?

Unemployment

Dante Co. allows employees to take two weeks vacation during each year. To account for the two weeks off each year, Dante will accrue the Vacation Benefits with a credit to the ________ account.

Vacation Benefits Payable

Employers are required to give each employee an annual report of his or her wages subject to FICA and federal income taxes, along with the amounts of these taxes withheld. This report is called a Wage and Tax Statement, or Form:

W-2

The form that an employee uses to indicate the number of withholding allowances filed with the employer is called Form _______.

W-4

Teva Co. has current period employee salary expense of $2,000. Employee withholdings total $850. To accrue the current period payroll, Salaries Payable will be (debited/credited) __________ in the amount of ___________.

credited; $1,150

Amounts withheld from employee's earnings for employee income tax is considered a _____ by the employer until the government is paid.

current liability

Keys Co. is located in Florida. An evacuation has been ordered due to Hurricane Edward, which is headed in the direction of Keys. Keys should record a contingent liability prior to the evacuation.

False Reason: Contingent liabilities cannot be recorded for future events.

The Wage and Tax Statement, or ___________, is a report that is required to be given to employees by January 31 following the year covered by the report. This report details the employees wages subject to FICA and federal income taxes, along with the amount of these taxes withheld.

Form W-2

Kenesha Co. reported income before interest expense and income taxes of $30,000; interest expense of $3,000; and income taxes of $4,000. Calculate the times interest earned ratio.

10 Reason: (30,000/3000)=10

Spot Co. purchases office supplies from Sally Supplies, Inc.. Spot does not pay cash for the purchase, and now owes the amount to Sally. This transaction would typically be recorded in which account in Spot's books? Multiple choice question.

Accounts Payable

Employers FUTA taxes are reported on IRS Form ____

Blank 1: 940

Employee benefits that are paid by the employer are recorded in the Employee Benefit _____ account.

Blank 1: Expense

_____ is the difference between the amount borrowed and the amount repaid.

Blank 1: Interest

KRS Co. sells merchandise for $120 and collects sales tax of $12. KRS would record the $12 sales tax with a credit to the Sales Tax _____ account.

Blank 1: Payable

Harvey Co. has current period employee salary expenses of $800. Employee withholdings total $300. The entry to accrue current period payroll will include a credit to Salaries _____ in the amount of $_____

Blank 1: Payable Blank 2: 500

When a company guarantees the payment of debt owed by a supplier, customer or another company, the guarantor usually discloses the guarantee as a ____ liability.

Blank 1: contingent

On January 8, Lee Co. borrows $100,000 cash from National Bank by signing a 90-day, 6% interest note. On April 8, Lee Co. will pay National Bank a total of $101,500. The difference between the amount paid back to National Bank of $101,500 and the amount borrowed of $100,000 (or $1,500) represents ____ expense.

Blank 1: interest

A measurable obligation arising from agreements, contracts, or laws is called a _____ liability.

Blank 1: known

Bina Consulting Co. collected $500 from a customer in advance to provide consulting fees for the next two months. The $500 would be recorded with a debit to Cash and a credit to the Unearned Revenues, which is a(n) _____ account.

Blank 1: liability

The reports that employers are required to prepare to explain how they compute local, state and federal payroll taxes are called _____ reports.

Blank 1: payroll

Paid absences offered to employees are called ____ benefits.

Blank 1: vacation

On March 1, Young Co. borrowed $1,000 by extending their past-due account payable with a 120-day, 6% interest-bearing note. On June 29, the due date, Young pays the amount due in full. This entry would be recorded by Young with a credit to _____ in the amount of ______. Multiple choice question.

Cash; $1,020 Reason: Interest is computed for 120 days. $1,000 x .06 x (120/360) = $20. Cash will be credited for $1,000 + 20. Notes payable will be debited for $1,000.

Lyon Co. collected $1,200 in sales tax from customers during the month of March. In April, Lyon sent the $1,200 sales tax to the state government. The entry to record payment to the state would include which of the following? (Check all that apply.)

Credit to Cash Debit to Sales Tax Payable

Star Co. reported $10,000 of net income during the month of January. Star estimates that it owes income taxes of $2,000 for the month. The month-end adjusting entry to record this estimate would require which of the following entries? (Check all that apply.)

Credit to Income Taxes Payable Debit to Income Tax Expense

Mary's Magazine Sales sells popular magazine subscriptions. During January, Mary collected $1,200 from various customers to provide magazines over the next 12 months. At the end of February, Mary would make an adjusting entry to record one month of magazines subscriptions earned. This transaction would include which of the following entries? (Check all that apply.)

Credit to Subscriptions Earned Debit to Unearned Subscriptions

Vance Co. allows employees to take a two week vacation each year. To account for the two weeks off each year, Dante will record an adjusting entry to which of the following accounts? (Check all that apply.)

Credit to Vacation Benefits Payable. Debit to Vacation Benefits Expense.

Niwa Co. replaced a $3,000 account payable balance to Fiona Co. with a 60-day, $3,000 note bearing 5% annual interest. Niwa's entry to record this transaction would include which of the following entries? (Check all that apply.)

Debit to Accounts Payable Credit to Notes Payable

Zilo Co. has accrued employee salary expense of $1,000 which includes employee withholdings that total $300. On payday, Zilo will record the payment with which of the following entries? (Check all that apply.)

Debit to Salaries Payable for $700. Credit to Cash for $700. Reason: The Salaries Expense account was debited when the payroll was accrued. The debit on the payment date will be to Salaries Payable. Cash will be credited for the net amount due which is $1,000-$300 withholdings = $700.

John Grey owns Grey's Snow Plowing. In October, he collects $12,000 cash for 6 commercial accounts for which he will provide snowplowing for the next three months. John recorded the cash collection as an unearned revenue. To record the adjusting entry in November, when $4,000 has been earned, Grey will enter which of the following entries? (Check all that apply.)

Debit to Unearned Plowing Revenue Credit to Plowing Revenue Earned

Handy Holly Co. provides a variety of household repairs and warranties her work for a six-month period. Holly provided $13,000 of service fees during the month and anticipates that warranty repairs for these sales will total $400. The entry that Holly will make to record the estimated warranty expense will include a credit which account?

Estimated Warranty Liability

Perez Co. sells lawn mowers and warranties them for one year. Perez made an adjusting entry at the end of last year to record the warranty expense. In February of the current year, a customer needed a $50 repair to a lawn mover. The entry to record the repair includes a debit to ___.

Estimated Warranty Liability

Leo Calvin is required to have ______ taxes withheld from his pay in order to cover the cost of future retirement, disability, survivorship and medical benefits.

FICA

The Federal Insurance Contributions Act provides retirement, disability, survivorship, and medical benefits to qualified workers. Laws require employers to withhold _____ taxes from employees' pay to cover costs of the system.

FICA

The federal government requires that employers are taxed on employee wages to provide unemployment benefits to qualified workers. These taxes are known as:

FUTA

To compute the amount of taxes withheld from each employee's wages, an employer needs to determine both the employee's wages earned and the employee's number of withholding allowances. The employer will determine the number of withholding allowances using the ___________.

Form W-4

During the first quarter of the year, Trina Co. accrued $6,000 of income taxes. On April 15, Trina will send in the first quarterly payment. The entry to record this payment will include a debit to the _______ account.

Income Taxes Payable

Each month, a corporation will accrue income taxes based on the month's earnings. To record the income tax for the month, the company will debit the Income Tax Expense account and credit the ________ account.

Income Taxes Payable

Which of the following formulas is used to compute the times interest earned?

Income before interest expense and income tax/interest expense

On December 1, Campbell Co. borrowed $10,000 cash from Second Bank by signing a 90-day, 6% interest-bearing note. On December 31, Campbell accrued interest expense of $50. Campbell does not use reversing entries. On March 1, the due date of the note, Campbell will record the payment with debit entries to which of the following accounts? (Check all that apply.)

Interest Expense for $100 Notes Payable for $10,000 Interest Payable for $50

Bushra Co. replaced a $1,000 account payable balance to Elin Co. with a 120-day, $1,000 note bearing 8% annual interest. Bushra's entry to record this transaction would include a credit to which account? Multiple choice question.

Notes Payable Reason: This is an accounts payable which is being replaced with a note payable, so Notes Payable is credited to increase it.

Perez Co. sells lawn mowers and warranties them for one year. Perez made an adjusting entry at the end of last year to record the warranty expense. In February of the current year, a customer needed a $50 repair to a lawn mover. The entry to record the repair includes a credit to ___.

Parts Inventory

The journal entry to record employer tax accruals includes a debit to:

Payroll Tax Expense Reason: The debit is to Payroll Tax Expense. FUTA Payable would be credited. SUTA Payable would be credited.

Which of the following is a true statement concerning the employer FICA taxes:

The employer must pay FICA tax in an amount equal to that paid by the employee.

True or false: A liability can be recorded, even if there is uncertainty of when to pay, how much to pay, or whom to pay.

True

True or false: Most large companies use a separate bank account for payroll purposes.

True

A company sells 12-month subscriptions to popular magazines. During the month of May, the company sells $10,000 in magazines, which will start in June. The journal entry to record the sales not yet earned will include a credit to which account?

Unearned Subscription Revenue

Which of the following liabilities could be a multi-period known liability? (Check all that apply.)

Unearned Subscription Revenues Notes Payable

Abby Co. allows each employee two weeks of paid time off during each calendar year. Since employees are working for 50 weeks, rather than 52 weeks, Abby must accrue the paid time off during the 50 weeks that the employees work. The year-end adjusting entry is recorded as a credit to the ________ account.

Vacation Benefits Payable

Which of the following items would be considered a current liability? (Check all that apply.)

Wages payable Notes payable, due in 3 months Accounts payable, terms n/30

A corporation computes $10,000 of income taxes expense of which $8,000 is currently due. The journal entry to record this adjustment includes:

a debit to Income Taxes Expense for $10,000.

Employee ________ are perks that are provided in addition to salaries and wages, such as all or part of medical, dental, life and disability insurance.

benefits

A ___________ is when an employer provides employees with a percentage of the net income earned during the year.

bonus plan

Angela Bennett is an employee of Marks Co. This past year, Angela received 1% of Marks net income, in addition to her annual salary. This added benefit is called a: _____

bonus plan

An employee earnings report includes all of the following: (Check all that apply).

employee's net pay employee's hours worked employee's gross earnings

A(n) ______ liability is a known obligation that is of an uncertain amount but that can be reasonably estimated.

estimated

The formula to compute the times interest earned is income before interest expense and income taxes divided by:

interest expense

A _____ is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.

liability

Bryne Co. sells merchandise and collects a 5% state sales tax. The tax is recorded on Bryne's general ledger as a(n) ______ account. Multiple choice question.

liability

When a company has a current obligation to make a future payment to their supplier due to a shipment of supplies that were received last week, the company would record this transaction with an increase to an asset account and a(n) ________ account.

liability

Woods Co. has a note payable due in monthly installments over the next five years. This note will be reported under which of the following categories of the balance sheet? (Check all that apply.)

long-term liabilities current liabilities Reason: The current year's payment will be included in current liabilities and the remainder will be reported under long-term liabilities.

Ace Company borrowed $10,000 from Fair Rates Bank by signing a two-year note payable. Ace's operating cycle is 14 months. This note would be considered a ______ on the balance sheet.

long-term liability

Unearned subscription revenues that extends over multiple periods is an example of a _______ known liability.

multi-period Reason: This is a multi-period liability because the unearned subscription revenue will extend over multiple periods.

Amounts withheld from an employee's gross pay are called:

payroll deductions

Which of the following represent reasonably possible contingent liabilities? Select all that apply.

potential legal claims debt guarantees Reason: Potential legal claims and debt guarantees are types of liabilities that are considered reasonably possible.

Most states require _____ payments and reports.

quarterly

A written promise to pay a specified amount on a stated future date within one year or the company's operating cycle, whichever is longer, is considered a __________.

short-term note payable

Cadie Construction Co. signed a note promising to pay a cement supplier $1,000 60-days from now. As a result of this transaction, Cadie would record a(n) ________ on her balance sheet.

short-term note payable

Examples of employee voluntary deductions may include all of the following except:

unemployment taxes.

Employers often withhold amounts from employees' earnings which arise from employee requests, contracts, unions, or other agreements. These withholdings are called employee __________ and include items such as medical premiums.

voluntary deductions

A known liability is a measurable obligation arising from agreements, contracts, or laws. Known liabilities would include all of the following items, except:

warranties.